Is Xinlian the answer to the Individual Credit Checking System in China?

An efficient credit checking system is critical for the development of retail financial services. But in China, the individual credit system is not as advanced as the ones in US or Europe with the People's Bank of China (PBOC) credit system covering only about 25% of the entire Chinese population. The lack of credit investigation system creates a major issue for the risk control process of the financial services, especially on the inclusive finance side.

In January 2015, the PBOC planned a six-month trial for the eight companies to work on setting up reliable credit checking platforms, however, two years have passed and none of the eight companies have received licenses to operate their individual credit checking business. It is obviously a disappointment for these companies, and also for the credit checking industry.

Considering it was the government that was pushing these companies to setup the platforms, what is the reason behind the lack of official licensing? According to Mr. Wan Cunzhi, the Director of Credit Investigation of PBOC, there are three main reasons:

“Isolated data islands” - The eight companies that setup credit rating platforms have developed products based on their own data and information and have thus-far not shared it with the other companies. Although the companies themselves may argue differently, realistically, without sharing, no platform can develop a comprehensive and reliable credit checking system.

Lack of independence - Companies such as Alibaba and Tencent do business in several different industries as well as sell financial products themselves based on the credit scores cannot really be considered real 3rd parties. As a result, it is difficult for them to have a truly independent view point when making deciding the credit scoring.

Lack of data management skills - Although the participants have developed efficient channels to collect data, the data security development does not receive enough attention. There have been many cases of leaking and hacker attacks. The customer’s privacy is a big concern when their data is not managed correctly.

To resolve these issues and pursue licenses, credit checking companies have decided to cooperate and will be setting up a credit network called Xinlian. The list of participants inlcudes Sesame Credit, Tencent, Qianhai, Kaola, and Pengyuan from the eight trial companies. Also, there are other platforms interested in joining the business, such as Baidu, Netease, 360, Xiaomi, Didi, and Creditease. Xinlian is structured under National Internet Finance Association of China (NIFA) and regulated by PBOC.

However, it is still under the process of being established and there are many issues to be solved. For example, for companies that have already invested hundreds of millions of dollars into data collection and system development, is it possible for them to share the information for free? To which level are the participants going to cooperate, considering the competitor relationships between companies like Sesame and Tencent? The reliability of the data shared is also an issue. In the small loan industry, some companies have already tried to share their black lists to prevent borrowers borrowing from different platforms. However, they would also mix the white list into the shared black list, as a way of preventing competitors stealing good customers. Would that happen again with Xinlian?

Although the government has given positive comments on the idea of a credit network association combining different resources, it may lead to big changes for the existing credit rating players and force industry consolidation. We may see only a few licensed players left in the market when all is said and done.